Abel, Andrew B.; Eberly, Janice C. - In: Review of Economic Studies 78, 4, pp. 1179-1200
We derive a closed-form solution for Tobin's Q in a stochastic dynamic framework. We show analytically that investment is positively related to Tobin's Q and cash flow, even in the absence of adjustment costs or financing frictions. Both Q and investment move in the same direction as expected...
